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Thursday, June 26, 2014

In 1998-99, I came
across this book “Rich Dad Poor Dad” by Robert Kiyosaki –

I had a good job then and a management degree
from XLRI – but my financial assets were close to NIL. This book changed my
life and this book started me in my wealth journey.

I have always had
wanted to be in one of his sessions – the closest I came to, was in Singapore in mid 2000, when he was having one of his
workshops there – but it was too costly for me to afford then.

I am happy to share
that he is coming for Delhi and Bangalore in Sept and having two day sessions in
each city. I am surely going with my family and I would recommend that you too register as
soon as possible. The ticket prices go up as the date comes closer and right
now (till 30th June) the
prices are very affordable.

Saturday, June 21, 2014

Ihave requests
from my ex students who are either
married or getting married shortly - the request is to share some best
practices of money management post marriage.

So here is my list - I am assuming that
the couple is living alone.

Best practices in Financial planning

If you both are working, then it is logical to have two independent
bank accounts for salary and tax purposes.

But once the money comes into your salary account – transfer the
whole amount into a joint account that can be operated by both of you. Do
not keep track of my money vs your money. The money earned by both of you
is common. Use this joint account for all expenses and for all savings and
investments.

Make a long term financial plan for the family – a 20 year plan is
what I recommend. In case you want more details, please read the first few
chapters in my book –the financial planner template that I have discussed
in my book is also available here for you to download (you will need to read the book for understanding the logic though) - https://dl.dropboxusercontent.com/u/73601331/20%20year%20financial%20plan%20template.xlsx .

Keep track of all expenses. There are quite a few expense
management apps available that run on smart phones –use one common app (with
two accounts -one for each one of you) and record the income and expenses on a daily basis. At the
month end, one of you must collate the income and expenses and update your
annual financial cash flow plan.

Create a budget for all expense heads that you use in the financial
plan. Try to live within this budget. If the budgets are low, then increase
the budgets in the financial plan.

You must internalise the difference between spending on assets vs
spending on liabilities. Assets are the ones that give you money (e.g. education
is an asset as it increases your earning power) and liabilities are the ones that take
money away ( e.g. a car or TV is actually a liability). Remember the
rich spend on assets and the not so rich spend on things they think are
assets but are actually liabilities.

Keep an eye on the financial plan vs actuals every six months and modify the
plan if it is deviating from the actual.

Discuss your financial plan with
your spouse every few months so that both of you are in sync on the path
ahead.

Use credit card as a convenience tool –do not take a loan based on
the credit limit - only use it if you have money in the bank.

Best practices in Investing

Learn investing – start with MF’s – it is easy to learn.

Move
towards stocks if you are interested.

Study the real estate market in
whichever city you want to invest in.

Avoid fixed deposits and Insurance
schemes that are positioned as investment and tax saving schemes.

Start SIP’s in a few MF’s so that your savings are automatically
invested in select MF’s.

You must aim to invest in a property with the help of your savings
and a home loan as soon as possible

Surely measure your ROI from investments every year. Over time the
ROI must be 15% or more .

Insure yourself and your spouse through a term insurance policy.

Take an
insurance cover for your vehicle and house.

If you do not have a
hospitalisation policy through your company – then take one.

Over time, these money management practices will result in you "Getting rich and retiring early".

Sunday, June 8, 2014

Term insurance
policy is a life insurance scheme that covers only risk of death and does not
offer any survivor benefits. It is like the insurance policy we take for our two
wheeler or car – we pay an annual premium – if we have an accident, the repair bills
go to the insurance company and they pay the bills subject to some deductions.
Similarly, in Term Insurance policy, you take a policy for a specified number
of years (let’s say 20 years), and specified cover (let’s say Rs 100 lacs) and
you pay an annual premium for the 20 years. In case if your demise in this period of 20
years, your dependants will get the insurance cover of Rs 100 lacs.

Term policy is the
plan B of your financial plan. Let’s say you have done a 20 year financial plan
and you are earning well and investing well. You are well on your way to get financially
independent in a few years. Even though you know that life cannot be taken for granted
and anything can happen to you any day – you assume that you will live till you
are old –really old. Well that is a fallacy - any one of us could meet our end any day.It is for mitigating this risk of untimely
demise, that we need to take a term insurance policy. If your financial plan (your
plan A) fails due to your untimely demise, the plan B (term insurance policy)
ensures that your dependants are not financially impacted and are safe.

So the answer to my
question “what is the best time to buy a term insurance policy” is NOW- you need to take the term policy now.

Anyone
who is earning and has financial dependents, should have a term insurance
policy. If both husband and wife are working, then both should take term
insurance policies.

The following are
the questions that I know you will have and I have tried to answer it:

How much cover should I
take?:Take enough so that your dependants will
have enough money to replace your income. For example, if your annual
income is Rs 10 lacs, then you should take at least a cover of 100 lacs –
this 100 lacs, if kept in a FD giving 10%, will give your dependants Rs 10
lacs. But then there is also inflation and taxes. So the thumb rule is as
follows:

If you are up to 25 years of age – take a cover of 20 times your annual
pre-tax income

If you are between 25 years and 35 years old – take a cover of 15
times your annual pre-tax income

If you are between 35 years and 45 years old – take a cover of 12
times your annual pre-tax income

If you are above 45 years of age – take a cover of 10 times your annual
pre-tax income

What about cover for my
loans? You must take
loan cover to ensure thatin the
case of your untimely demise, your family is not saddled with the
repayments. For every loan that you have, take a term loan cover.

My company already has a group
term insurance policy -so do I need to take it once again? Typically companies offer term cover up
to a certain level. So if your company offers you a cover of Rs 50 lacs -
then you calculate the additional cover that you need (based on the
calculations shown in point 1 above) and take a cover for that amount on
your own.

Till when do I need the
cover? You need the cover till your are
financially independent – once you are financially independent of a job,
then you financial assets pay for your living and in the case of your
untimely demise, your family will still have the financial assets paying
for their living. But you cannot be sure of when you will reach financial
independant – so take a term policy for a max period – typically till your
retirement age. In case you reach financial independence before your
retirement age, then you can stop paying the premium and discontinue the
policy.

How much is the premium
normally? The table
below gives indicative range of premium per year. These are indicative and
there are many more insurance companies – so you do your research and take
a decision.

Annual Premium for
Rs 100 lacs cover till 50 years of age for a non smoker male

Age

30

35

40

45

50

Insurance policy

LIC eTerm

16400

20100

25000

32300

41000

HDFC Click2protect

13500

16000

20500

28500

41000

ICICI Pru iCare

19000

23500

30500

41000

56100

SBI Life eShield

14500

17300

21500

26500

33500

Bajaj Alliance iSecure

14500

18500

25250

32700

43250

Reliance online term

8100

10700

14900

21700

27000

Do I buy it online or
through an agent?No agent will tell you to buy it
online. They will also tell you many reasons why you should buy it from
them. But remember, an agent is commission biased. Typically, the same
policy when bought online would be 20% cheaper – because the agent’s
commission is discounted. Further the insurers see the typical online
customer as a low risk, educated, reasonably well earning individual -the kind of customers the insurance
company wants to attract. So these policies online are aggressively priced
as compared to the same offline
policy. Remember, your relationship with the insurance company is the same
whether you buy it through an agent or buy it online

What about medical tests?
All term life policies
bought online will be followed by a mandatory medical test which is funded
by the insurance company. The policy premium can change if there are health
issues found during the medical tests. One needs to go through this and it
is basically good for you as otherwise, how often do you actually go
through a complete medical check? But remember that, you will not get the
results of the medical tests – that will be sent to the insurance company.

Is this premium tax
deductible? – Yes, -you
can claim tax deduction for the premium paid for term insurance policies
under sec 80C (up to Rs 1 lac of premium per annum)

Give all details to the insurer to the best of your knowledge – correct age,
correct salary are important.If you are a smoker – clearly
tell them that (it will increase your premium by about 25%). Remember, your family
will need to answer some of these questions to the insurer in the case of your
un-timely demise.

Also if you notice,
the table above clearly mentions male. The premiums for women are higher by
about 10%.

So to answer the question raised above? – Well I guess you have the
answer already J